The Expanding
Frontiers of Asset
Securitization
Group I :
Institute of Statistics
914007 Chen, Yu-Huei
914008 Liu, Fang-Yi
Outline
 What is Securitization?
 What is Asset-Backed Securitization?
 The Collateral Types of ABS
 The Development of the ABS Market
 The Advantages of Securitization
 The Process of Securitization
 Taiwan’s Difficulties
 Reference
What is Securitization?
Securitization
 A company raises money from capital market by issuing
securities that are backed by specific assets.
 In most cases, the underlying assets are loans, such as
mortgage loans or auto loans.
 The cash flow from the underlying assets usually is the
source of funds for the borrower/issuer to make
payments on the securities.
 Securitization products generally are viewed as
including the following: asset-backed securities,
mortgage-backed securities,corporate bond, commercial
papers, etc.
Securitization
Financial Asset
Securitization
General
Securitization
Securitization
Corporate
Securitization
Estate
Securitization
Corporate Bond
Stock
MBS
Auto Loan
Credit Card
What is Asset-Backed
Securitization?
Asset-Backed Securitization
 Asset-backed Securities (ABS) are essentially securities
entitled to the cash flows from a specific pool of assets
 These assets can be a variety of loans or receivables, such
as:

Credit Card receivables

Auto loans

Mortgages
 In an ABS deal, the issuer, or loan originator:

transfers assets into a SPV;

the SPV issues securities and sells these securities to investors.

investors are entitled to the cash flow from the assets.
ABS Typical Legal Structure
Loan Originator
True Sale
 The seller transfers assets
(receivables/loans) to a specialpurpose vehicle (SPV).
 The SPV transfers the assets to
Bankruptcy
Remote SPV
investors. The assets of the SPV
will not be consolidated with the
issuer’s in case of a bankruptcy.
 The SPV then issues securities to
investors
Investors
 Investors are entitled to the cash
flows from the assets.
True Sale
 An actual sale, as distinct from a secured borrowing,
which means that assets transferred to an SPV are not
expected to be consolidated with those of the sponsor
in the event of the sponsor’s bankruptcy.
 Rating agencies usually require what is called a
.
truesale
opinion from a law firm before the securities
can receive a rating higher than that of the sponsor.
Example
Original Flow
American
Cardholders
Monthly Principal & Interest
Express
 Cardholders pay monthly principal and interest to American
Express for their monthly credit card payments, including
principal, interests, annual charges and other penalty charges.
Example
Flow After Structuring
Cardholders
Monthly Principal &
Interest
SPV
Investors
Monthly Principal &
Interest
 In an ABS deal, American Express transfers its rights to a specified pool of
receivables into a SPV.
 Proceeds from the specified pool of American Express cardholders will go
to the SPV. The SPV in turn pays the investors.
 American Express is no longer entitled to the receivables.
The Collateral Types
of ABS
Assets Types & ABS Issuers - I
Credit Cards:

Receivables from monthly payments by credit card holders.

Issuers include:
– Banks which issue VISA or MasterCard
– American Express and Discover
– Saks, Neiman Marcus, Circuit City and similar retailers which issue retail cards
Auto Loans and Leases:

Auto loans for car purchases or leases

Issuers include:
– Financial Subsidiaries of GM, Ford, Honda, Nissan, Daimler Chrysler
– Banks such as Banc One, Chase
– Independent finance companies such as Arcardia, Union Acceptance
Corporation.
Asset types & ABS Issuers - II
Home Equity Loans

Liens on homes

Issuers include independent finance companies: Residential Funding
Corp (RASC), Option One Mortgage Corp, Long Beach Mortgage Co,
Country-Wide Home Loans.
Manufactured Housing Loans

Loans on Manufactured Housing

Mainly issued by Ginnie Mae, a US-Government Sponsored Enterprise
Student Loans

Loans to university and graduate students to finish degree

Main issuer is the Student Loan Marketing Association (Sallie Mae)
Asset types & ABS Issuers - III
Equipment Loans and Leases

Loans and leases to finance medium/heavy equipment.

Issuers include AT&T, Caterpillar, Case, John Deere.
Aircraft leases

Leases on commercial aircraft.

Mainly issued by GPA.
Insurance Premium Receivables

Loans to commercial borrowers to finance insurance premiums.

Main issuer is A.I.Credit.
The Development of
The ABS Market
Development of Asset Securitization
 Began from the Mortgage-Backed Securitization

1930s FNMA was launched for estate market.

1970s First Mortgage-Pass Through (MPT) security was issued.

1980s First Collateralized Mortgage Obligation (CMO) was issued by
FHLMC.
 Applied this technology to other assets

1985 A computer lease-backed transaction was issued by Sperry.
First public auto loan-backed security was issued.

1987 First public credit card-backed security was issued.

1989 First public home equity loan-backed security was issued.

1993 First student loan-backed securitization.

1994 First insurance premium-backed transaction.
Highly Liquid Market
Amounts in millions
275,000
$259,600
250,000
$221,243
225,000
$197,294
$189,084
$184,589
200,000
175,000
$149,560
150,000
125,000
$112,041
100,000
$75,356
75,000
$50,341
$42,347
50,000
25,000
$10,041 $9,763
$59,673
$50,758
$24,707
$15,456
$1,237
0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1985 Through 2001
1997
1998
1999
2000
2001
Year
American Bond Market
AssetBacked
Securities
7%
MortgageBacked
Securities
27%
Agency
Debentures
15%
U.S
Treasuries
33%
Corporate
Bonds
18%
Development of ABS Outside the U.S.
 The U.K. is the leading country for securitization in Europe.

The first MBS has been issuing since 1987.

Favorable legal and regulatory environment
 France is the second largest issuer of ABSs in Europe.
 Other European countries that have issued ABSs include Spain,
Sweden, and Italy.
 Asset securitization in Canada has grown rapidly from 1992.
 Securitization in Japan continues to move at a glacial pace.

“Divided receivables” cannot be traded in the secondary market

The reluctance of many non-bank finance companies
Securitization Outside the U.S.
Australia
10%
Asia
6%
Other
5%
Europe
79%
Diverse Universe of Collaterals
Amounts in millions
275,000
CC
Auto
HEL
MH
Equip
Student
Other
$259,600
250,000
$221,242
225,000
$197,294
200,000
$184,589
$189,084
175,000
$149,560
150,000
$112,041
125,000
100,000
$75,356
75,000
$50,758
$59,673
50,000
25,000
0
1992
1993
1994
1995
1996
1997
Year
ABS Supply By Sector
1998
1999
2000
2001
Expansion of Collateral Types
Home Equity
Loans
22%
Auto Loans
25%
Credit Cards
20%
Others
33%
Student Loans
Manufactured Housing
Equipment
Insurance Premium Re.
Marine Loans
CBO / CLO
ABS Senior Classes (by Weighted Average Life)
7 to 10 Years
7%
10 Plus Years
3%
Zero to 1 Year
13%
5 to 7 Years
15%
1 to 3 Years
35%
3 to 5 Years
27%
The Advantages of
Securitization
Advantages of Securitization
 For Issuer
 Capital
Efficiency
 Funding
Diversification
 Asset-Liability
 Gain
Management
on Sale
 Off-Balance-Sheet
Advantages of Securitization
 For Investor
 Attractive
 Risk
Nominal Yield
Protection
 Generally
Low Prepayment risk relative to
MBS
 Excellent
Liquidity
Advantages of Securitization
 For Supervisor
 Distribute
 Manage
 Lower
 More
Capital Efficiency
Risk Efficiency
the Management Cost
Stable Financial system
Advantages of Securitization
 For Macro-Economic
 Informational
 Allocational
 Pricing
Efficiency
and Operational Efficiency
Efficiency
Top 10 Issuers 2001
Auto Sector
1
2
3
4
5
6
7
8
9
10
Ford
$16,963.40
AmeriCredit
7,576.80
DaimlerChrysler
6,200.00
Honda
4,881.80
Nissan
4,511.40
MMCA
3,853.30
WFS Financial
3,570.00
Toyota
3,294.00
Capital Auto
2,700.50
Chase
2,499.10
Credit Card Sector
1
2
3
4
5
6
7
8
9
10
Citibank
$11,400.00
Capital One
8,237.80
MBNA
8,168.90
Chase
6,038.10
American Express 4,669.00
Discover
4,052.60
First USA
3,479.20
Household
2,526.10
Metris
2,434.90
Fleet
2,359.80
Buyers of ABS
Others
3%
Money
Managers
35%
Insurance
10%
Corporates
11%
Banks
30%
Government
11%
The process of
securitization
The Mechanics of Securitization
debtor
Principals
and interests
Cash flows
Special
purpose trust
originators
investors
Cash flows
Credit
enhancement
Credit
rating
institutions
Investment
bank
ABS Cash Flow Diagram
Excess
Loan
Interest
Defaults
Servicing
Fee
ABS
Coupon
Loan
Loan
Principal
Principal
Assets
ABS
Investment
ABS
Investor
Asset
Manager
Loss
Coverage
Credit
Enhancement
or Returned
to Seller
MPT – Mortgage Pass Throughs
Pass Through is the simplest principal repayment structure. Amortization
and prepayment cashflows from the collateral are transferred directly to the
security holders.
Outstanding Balance, $MM .
500
450
Interest
400
Principal
350
300
250
200
150
100
50
0
1
3
5
7
9
11
13
15
17
19
21
23
Time
25
27
29
31
33
35
37
39
41
43
45
CMO ( Collaterized Mortgage Obligations)
In a sequential, principal cashflows from the underlying collateral are
allocated to one tranche at a time. When one tranche is paid off, the next
tranche receives all the principal and so on. In other words, the tranches are
sequentially allocated principal payments.
Advantages of CMO(contrast to MPT)
 The portfolio of CMO is bigger that has more
stable statistical properties.
 Stable investment period.
 Consistency to investor’s demand.
PAC(Planned Amortization Class)

Provide the bonds with highly stable cashflows.
0-1 bond
0-3 bond
0-4 bond
(CS)
(Companion
Securities)
(CS)
principal
0-2 bond(PAC)
repayment
time
Advantages of PAC
 Stable cash-flows
 High credit qualities
 High yield
Floating-rate CMO(FRCMO)
 Attract the Euro dollars and floating-rate bonds
investors
 Generally issue with Reverse Floaters.
 Caps and floors.
Example
Floater
Reverse
Coupon rate
LIBOR+0.0065
0.424-4*LIBOR
Value
$40m
$10m
The average weighted interest always equal:
40/50(LIBOR+0.0065)+10/50(0.424-4*LIBOR)
Advantages of FRCMO
 The price volatility is smaller than fixed interest
rate bond.
 Balance the assets and liabilities.
Stripped MBS
 Objectives:hedge and speculation
 Example:

A1(principal):coupon rate=5%,below par

A2(interest):coupon rate=605%,over par

Cost of funding=5%*0.99+605%*0.01=11%
 PO(principal only)
 IO(interest only)
The influence of interest on PO & IO
Market
rate
prepayment
Bond price
Discount rate
Bond price
prepayment
Bond price
Discount rate
Bond price
prepayment
Bond price
Discount rate
Bond price
Prepayment
Bond price
Discount rate
Bond price
Net
effect
PO
Market
rate
Market
rate
Net
effect
Net
effect
IO
Market
rate
Net
effect
Concerns raised by securitization
 Adverse selection

Securitize lower risk loans to reduce credit enhancement costs and
lower due diligence expenses.
 Risk shifting

Sell only the weakest assets through securitized structure.
 Moral hazard
 “Window Dressing” of financial statements
 Legal uncertainties
Taiwan’s Difficulties
Problems of securitization in Taiwan
 Lack of motivations to sell CMO.
 Lack of sufficient data and analysis.
 Lack of sound and economic scale bond market.
 Lack of standard and suitable laws.
References - I

Books
1.
陳文達、李阿乙、廖咸興，「資產證券化理論與實務」 ，智勝出版社，2002
年8月
2.
李儀坤，「金融證券化之可行性研究」 ，台北銀行經濟研究室，1995年6月
3.
Mason、Merton、Perol、Tufano， 「 Cases in Financial Engineering」，Prentice
Hall，1995

Journals & Reports
1.
廖咸興、李阿乙，「推動抵押債權證券與金融機構流動性」，新世紀智庫論壇
第15期，2001年9月
2.
儲蓉，「金融資產證券化之探討(上)(下)」 ，台灣金融財務季刊第二輯第三、
四期
References - II
3.
吳家昌、游迺文，「金融資產證券化及其對金融業影響之探討」 ，金融財務
第4期
4.
「資產證券化」，國泰人壽綜合企劃室，1997年2月
5.
李阿乙，「資產證券化專題研討」 ，台北金融研究發展基金會教育訓練中心
，2001年3月
6.
「投資資產抵押債券(ABS)」，Deutsche Bank，2002年11月
7.
「Asset-Backed Securities: Introduction to the Market and its Structures」，
Goldman Sachs ABS Research，May 1998
8.
「The U.S. Asset-Backed Securities Market」， Banc of America Securities LLC，
2002
THE END
^__^